Unanticipated and Unexpected Price Level Changes

willingness to pay goes down. When this happens, consumers turn to alternate goods that may not be as efficient or as high in status, but still get the job done. If the price of butter goes up,

The inflation rate is constantly changing every day. The entire investment community is always on the look out for what the future inflation rate may be. It has been proven that a healthy economy preforms best when inflation rate is

Given the values of all the other variables that affect demand, a higher price tends to reduce the quantity people demand, and a lower price tends to increase it. Of course, price alone does not determine the quantity of a good or service that people consume. Coffee consumption, for example, will be affected by such variables and income and preferences, as we will see later.

Imagine that you have a fixed 30-year interest rate for your mortgage, and the economy has experienced unanticipated inflation. Examine who the winner and loser would be. Is it the borrower or the lender in the given scenario? Provide support for your response.

market, there is price competition. This can lead to price wars and, therefore, lower prices for

The use of inflation determines the gain of benefits that will be put into place. An

Lenders will benefit from unanticipated inflation because they can rise interest and make more money. Bowers will benefit from anticipated inflation because they had time to plan.

The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability contributes to achieving high levels of economic activity and employment by improving the transparency of the price mechanism. Under price stability people can recognize changes in relative prices without being confused by changes in the overall price level. This allows them to make well-informed consumption and investment decisions and to allocate resources more efficiently. It reduces inflation risk premia in interest rates (i.e. compensation creditors ask for the risks associated with holding nominal assets). This reduces real interest rates and increases incentives to invest and avoiding unproductive activities to hedge against the negative impact of inflation or deflation. It also

Inflation has been below the Federal Reserve’s target for more than 3 and a half years. Inflation is expected to keep declining under desired target as long as the oil prices are declining as well. “Yield movements in the Treasury inflation-protected securities, or TIPS, market indicate that compensation for inflation expected in five to 10 years has dropped to 1.56% annually, according to Barclays. That is down from 1.67% when the Fed raised short-term rates in December. Moreover, it is down from 2.5% two years ago” (Leubsdorf). If less inflations is expected in the future, it could change the way people are spending their money, but if they assume that the inflation is going to keep increasing, the prices are more likely to keep rising at a faster pace.

When the prices for stuff are increasing and expensive, the government likes to try to make things better. This is actually, something that is actually occurring in big cities, especially when it comes to rents. When there is more demand, people like to increase the prices in order to achieve having more revenue. this as well increases the prices of supplies because of the demand.

When more or some items are supplied than demanded, competition among sellers trying to get rid of the excess will force the price down, discouraging future production. The resources used for that item being set free for use in producing some else that is in greater demand. Conversely, when the demand for a particular item exceeds the existing supply, rising prices due to competition among consumers encourages more production, drawing resources away from other parts of the economy to accomplish that.

Businesses will increase the production of goods and services that cost more money because they will be able to increase their profit margins. In the same way, when prices decrease they will scale back the production of those products because they will not be able to as much of a profit. Companies will always do what is best for them, and the number one reason for them being in business is to make money. What the consumer wants will always dictate they type and price of goods and services that are supplied. When a certain type of product comes out or starts to increase in sales it directly affects the market for that product or service. An example of this is when iPods came out and got very popular. The price of the product was high initially, but they were still selling very well. Apple increased its production because they were able to make greats profits from it. After this happened there was an influx of other mp3 players from a plethora of other electronics companies. Since they had new found competition, Apple was forced to lower the price of the item. Consumers still preferred the iPod over many of the other mp3 players on the market, and because of their presence, the iPod became much more affordable.

“When supplies of goods and services become plentiful, prices tend to drop. When supplies become scarcer, prices tend to rise.” (Understanding Business, Nickels,McHugh and McHuhg P.37.)

Lastly, since inflation aiming, equally assist to deliver firm macroeconomic settings and further suggests that interest rates will be inclined towards upsurge throughout booms of asset price (inflationary)as well as busts of asset price (deflationary). At the first place, this methodology may moderate the possibility for financial panics to occur (Bernanke, Gertler, 2000).

Inflation is a factor that decisively affects the nature or outcome of interest rates. “Inflation is an increase in prices of goods and services over time”(Financial Institutions, Instruments and Markets, 2012). Inflation is the natural byproduct of a robust, growing economy. No inflation, or deflation (the lowering of prices), is actually a much worse economic indicator. Also, in a healthy economy, wages rise at the same rate as prices. A standard explanation for the cause of inflation is "too much money chasing too few goods" This is also called the demand-pull theory. For several possible reasons, more money is being spent than normal. This could be because interest rates are low and